Gov­ern­ment has been on a mas­sive al­beit strug­gling in­franstruc­ture drive for years, and the re­cent down­grades by rat­ing agen­cies will only make the sit­u­a­tion worse as paras­tatals are also af­fected one by one.

Finweek English Edition - - IN DEPTH - ed­i­to­rial@fin­ By Andile Ntingi Andile Ntingi is CEO and co-founder of GetBiz, an e-pro­cure­ment and ten­der no­ti­fi­ca­tion ser­vice.

a fter South Africa’s gov­ern­ment debt was dra­mat­i­cally down­graded by global credit rat­ing agen­cies Stan­dard & Poor’s (S&P) and Fitch, newly ap­pointed fi­nance min­is­ter Malusi Gi­gaba has put on a brave face, mov­ing fast to re­as­sure wary in­vestors that the country will main­tain its fis­cal dis­ci­pline fol­low­ing Pres­i­dent Ja­cob Zuma’s ma­jor Cab­i­net reshuf­fle at the end of March.

Gi­gaba’s words and deeds will de­ter­mine the out­come of gov­ern­ment’s mas­sive in­fra­struc­ture drive, which has strug­gled even dur­ing the fat years to pro­duce the cov­eted “in­clu­sive growth”.

In the last week of April, Gi­gaba was in the US to try and quell fears that the down­grades will in­crease bor­row­ing costs and com­pro­mise the state’s abil­ity to de­liver in­fra­struc­ture in an econ­omy that is plagued by stag­nant growth, high in­fla­tion, and ris­ing un­em­ploy­ment. The fears are not base­less. The down­grades have al­ready dragged down the credit rat­ings of Eskom and Transnet, both state-owned en­ter­prises (SOEs) which are at the fore­front of gov­ern­ment’s plans to spend R947.2bn on in­fra­struc­ture devel­op­ment over the next three years.

Roughly 77% of the spend­ing is ear­marked to go to­wards up­grad­ing eco­nomic in­fra­struc­ture, pre­dom­i­nantly in en­ergy, trans­port and lo­gis­tics, wa­ter and san­i­ta­tion. The bulk of it (R432.8bn) will be spent by the SOEs.

Other key SOEs in the in­fra­struc­ture pro­gramme, the SA Na­tional Roads Agency (San­ral) and the Pas­sen­ger Rail Agency of SA (Prasa), have not yet been down­graded, but they are be­ing closely watched by the rat­ing agen­cies as they are de­pen­dent on gov­ern­ment guar­an­tees to raise funds from the cap­i­tal mar­kets.

In spite of the credit down­grades set­back, the fi­nan­cial ex­ec­u­tives at Eskom and Transnet have mim­icked Gi­gaba by keep­ing their chins up, is­su­ing state­ments that hinted that the com­pa­nies will forge ahead with their in­fra­struc­ture roll-out plans and will shrug off an in­crease in in­ter­est re­pay­ments stem­ming from the down­grades.

“We are con­fi­dent that we will suc­cess­fully ex­e­cute Eskom’s fund­ing plan over the next five years backed by the avail­abil­ity of the gov­ern­ment guar­an­tees; the only chal­lenge that Eskom will have to con­tend with will be the higher cost of debt,” said Anoj Singh, Eskom’s chief fi­nan­cial of­fi­cer, in a state­ment.

The state­ment was re­leased on 7 April af­ter the com­pany’s long-term cor­po­rate credit rat­ing was low­ered to B+, two notches be­low in­vest­ment grade, from BB- by S&P. The down­grade was im­me­di­ately fol­lowed by Fitch, which low­ered of the paras­tatal’s long-term lo­cal cur­rency is­suer de­fault rat­ing (IDR) and its se­nior un­se­cured lo­cal cur­rency rat­ing to BB+, one notch be­low in­vest­ment grade, from BBB-. Moody’s warned the SOE that it too was on the verge of down­grad­ing it.

On the other hand, Transnet said it had taken steps to mit­i­gate the down­grades.

Prior to the down­grade of its credit rat­ing by S&P to BB+, one notch be­low in­vest­ment grade, the SOE had “proac­tively and suc­cess­fully ne­go­ti­ated” with its lenders to lower and re­lax the credit rat­ing de­fault trig­gers to sub-in­vest­ment grade on 26% of its debt port­fo­lio.

“The com­pany has strong liquidity and has se­cured more than R16bn in un­used short-term credit fa­cil­i­ties that are avail­able within 24 hours, as well as long-term spe­cific com­mit­ted fund­ing in ex­cess of R15bn.

“Fur­ther­more, the com­pany has ac­cess to the do­mes­tic and global cap­i­tal mar­kets through the Do­mes­tic Medium-Term Note and Global Medi­umTerm Note pro­grammes amount­ing to R93bn to meet its fund­ing com­mit­ments,” said Garry Pita, Transnet group chief fi­nan­cial of­fi­cer.

How­ever, some com­pa­nies par­tic­i­pat­ing in the in­fra­struc­ture pro­gramme are con­cerned that the credit down­grades and the de­pre­ci­a­tion in the value of the rand may lead to gov­ern­ment de­lay­ing or can­celling projects as they be­come too ex­pen­sive to roll out due to high fi­nanc­ing costs.

“The cost of for­eign debt for in­fra­struc­ture projects will rise, in­creas­ing over­all project costs. How­ever, the in­crease in project costs will not be off­set by an in­crease in op­er­at­ing in­come and there­fore re­turns from such projects will drop,” said Siyabonga Mbanjwa, man­ag­ing di­rec­tor of SENER South­ern Africa, a con­trac­tor that

pro­vides con­cen­trated so­lar power to Eskom.

Mbanjwa also pre­dicts that the fall in the rand trig­gered by the Cab­i­net reshuf­fle and the down­grades will in­crease the cost of im­ported ma­te­ri­als and equip­ment used in the in­fra­struc­ture projects.

“This will in­crease over­all project costs and re­duce re­turns. Mar­ginal projects could be stopped or de­layed as a re­sult,” he pointed out.

While Eskom and Transnet sound more re­silient, San­ral is deeply fear­ful of a po­ten­tial down­grade of its credit rat­ing, which will in­crease its bor­row­ing costs and un­der­mine its abil­ity to raise fund­ing.

In Novem­ber last year, Moody’s placed San­ral on re­view for a pos­si­ble down­grade due to con­tin­u­ing de­te­ri­o­ra­tion in cash flows from the Gaut­eng Free­way Im­prove­ment Project (GFIP) and ris­ing fund­ing chal­lenges at a time when the roads in­fra­struc­ture provider faced large debt ma­tu­ri­ties.

“For the toll port­fo­lio – which in­cludes GFIP, N1 North, N1 South, N3 Mar­i­annhill, Tsit­sikamma, Huguenot tun­nel, N2 North and South Coast – this will have dire con­se­quences for ex­ist­ing projects, which main­tains the routes and en­sure a level of ser­vice to the cus­tomer that is re­quired for a toll road. It also means that fu­ture projects for strength­en­ing or re­ha­bil­i­ta­tion of these ex­ist­ing routes will be postponed,” said San­ral spokesman Vusi Mona.

About 85% of San­ral’s 21 490km-long road net­work is funded through di­rect trans­fers from Na­tional Trea­sury, while the re­main­ing 15% of the port­fo­lio is funded through toll fees levied on mo­torists. The con­tro­ver­sial GFIP has been met with re­sis­tance from Gaut­eng mo­torists, many of whom are re­fus­ing to pay their e-toll bills, putting pres­sure on the rev­enue from the project, which is needed by San­ral to re­pay a R20bn debt linked to the project.

Be­cause San­ral’s credit rat­ing is in­her­ently linked to the na­tional gov­ern­ment’s debt, an­a­lysts say the low­er­ing of gov­ern­ment’s credit rat­ing will even­tu­ally af­fect the 85% of San­ral’s roads port­fo­lio funded from Trea­sury.

This even­tu­al­ity may slow down the is­suance of ten­ders by San­ral to build and main­tain roads.

“If a down­grade oc­curs, San­ral might be forced to re­al­lo­cate fund­ing in­ter­nally within its port­fo­lio, which might re­duce its abil­ity to de­liver its full roads pro­gramme and there­fore af­fect the to­tal pool of roads com­ing into the mar­ket,” ar­gues Jean-Pierre Labuschagne, Africa In­fra­struc­ture and Cap­i­tal Projects Leader at Deloitte.

Ac­cord­ing to the Bud­get Re­view pub­lished by Trea­sury in Fe­bru­ary this year, San­ral was al­lo­cated R36.8bn to up­grade and main­tain 85.5% of the na­tional non-toll and coal-haulage road net­work over the next three years.

Eskom will spend R203.8bn of the R947.2bn public sec­tor in­fra­struc­ture bud­get to ex­pand power gen­er­a­tion and dis­tri­bu­tion, while Transnet is ex­pected to spend R118.4bn to ac­quire mod­ern lo­co­mo­tives and wag­ons and to up­grade rail­way routes and ports.

Prasa, which is plagued by lead­er­ship in­fight­ing and mis­man­age­ment, was al­lo­cated R45.3bn by Trea­sury to pro­cure new trains for Metro­rail (com­muter ser­vice); ac­quire new lo­co­mo­tives for Shosholoza Meyl (its main­line pas­sen­ger ser­vice); and to mod­ernise its sig­nalling, train sta­tions and rail in­fra­struc­ture.

Wa­ter and san­i­ta­tion also has a big slice of the bud­get and is ex­pected to spend R125.3bn. The money will be used to de­velop and re­ha­bil­i­tate wa­ter in­fra­struc­ture, in­clud­ing dams, canals, wa­ter treat­ment works, reser­voirs and pipe­lines, which are aimed at con­nect­ing house­holds, mines and fac­to­ries to wa­ter ser­vices.

Since the late 1990s, the SA gov­ern­ment has in­vested heav­ily in in­fra­struc­ture devel­op­ment. The public sec­tor spent more than R2.5tr on in­fra­struc­ture be­tween 1998/99 and 2015/16. SOEs were the big­gest con­trib­u­tors to the ex­pen­di­ture over this pe­riod, contributing R1.1tr in to­tal. Those fig­ures are im­pres­sive, but they have done lit­tle to ame­lio­rate the in­fra­struc­ture back­log. Not to men­tion that much of the in­fra­struc­ture ar­rears ac­cu­mu­lated dur­ing pe­ri­ods of record growth.

These days growth barely reg­is­ters a blip on the radar, while the freshly in­stalled fi­nance min­is­ter is con­fronted with ob­sta­cles that re­quire far more than a charm of­fen­sive to over­come.

Malusi Gi­gaba Min­is­ter of fi­nance

A cus­tomer waits to buy an e-tag in Jo­han­nes­burg.

Jean-Pierre Labuschagne Leader of Africa In­fra­struc­ture and Cap­i­tal Projects at Deloitte

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